June 2020
Intermediate to advanced
896 pages
27h 4m
English
Content preview from Valuation, 7th Edition
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23 Retirement Obligations
To attract and retain talent, companies often offer retirement benefits to employees. These benefits include fixed pension payments, tax-advantaged savings plans, and promises to provide medical benefits when the employee retires. In some countries, companies are required to set up separate funds to pay these benefits, but inconsistencies are common because of differences in regulations and tax policy. For example, in the United States, companies must set up separate funds for pension promises (known as defined-benefit plans) but not for promises of retiree medical benefits. If the value of investments does not fully fund future promises, the company will have unfunded retirement obligations. Since the company is responsible for any shortfalls and these obligations take precedence over equity, any accurate valuation must account for them.
This chapter explores how to analyze and value a company with pension and other retirement obligations. Recent accounting changes have made the analysis easier, but careful thinking and reorganizing of financial statements are still required. The challenges include deciding which part of the pension expense is operating versus nonoperating, treating the balance sheet for unfunded or overfunded obligations, estimating the cost of capital for companies with pensions, and adjusting equity value to reflect unfunded (or overfunded) retirement obligations.
Reorganizing the Financial Statements with Pensions
In the past, ...
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